Midterm issues: deficits and debt (E-43)

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The fiscal problem was barely mentioned during the last presidential campaign. Kicking the fiscal can down the road, 9/5/16.

Neither Hillary Clinton nor Donald Trump has proposed meaningful solutions for chronic deficits and soaring debt. Both of the candidates are aware of the fiscal problem, of course, so how do they propose to deal with it in their economic plans? Oops, looks like their main idea is to ignore this problem in hopes that it will go away – as most of the nation’s political leaders have been doing for years.

Two years on, things are no better. This nation will pay a heavy price if inaction continues – and SAFE is not alone in saying so. America is headed for fiscal catastrophe – and no one seems to care, Justin Haskins [Heartland], townhall.com,
7/23/18.

On its current trajectory, the United States will by 2027 likely be paying $500 billion to $1.2 trillion every year [the chief variable is interest rate levels] to cover federal debt interest payments. If the economy were to crash, the only way for America to continue making those payments without raising taxes or cutting spending, both of which would be very difficult to do in a deep recession, would be to seek additional loans from foreign governments or to print money. The former would only work, if at all, temporarily, and would eventually exacerbate the problem as interest payments grow ever higher. The latter is the most likely scenario, but printing money would create inflation, devaluing existing cash.

There being no conceivable way to solve the fiscal problem before the midterm elections, what will candidates say about the matter? The basic choices: (a) the other side is to blame, or (b) here’s my proposed solution? Discussion follows.

A. Current situation – Some selected budget data are recapped below; read them and weep! Mid-Session Review: FY 2018, 7/13/18.

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Democrats will predictably attribute projected deficits to the GOP tax cuts enacted in 2017 and slam the Tax Reform 2.0 proposal (which doesn’t stand a chance of getting enacted before the elections) for increasing them. Tax Reform 2.0 robs even more from your future, USA Today, 8/5/18.

The latest tax ideas are classic examples of Washington being unable to address the common good, or to see beyond the next election. The nation's leaders should be looking at ways to raise revenue and control spending on benefit programs, not new ways to balloon the national debt.

Not so fast, Republicans may counter, because tax cuts will boost economic growth and thereby offset revenue losses. See, e.g., The corporate tax cut is paying for itself, Stephen Moore, Wall Street Journal,
9/18/18.

The federal government is expected to capture a bit more than 18% of that extra output [more than $6 trillion in additional GDP over the decade] in tax revenue—about $1.1 trillion over the 10-year window. That’s well above the $400 billion to $500 billion expected revenue loss from the corporate tax-rate cut.

Many things can affect economic results, however, and it would be foolish to assume that a good quarter or two of economic growth represents a fundamental turnaround. Consider, for example, the potential effects on the US economy if a trade war with China materializes. Trump boasts tariffs work: “Very strong bargaining position,” S. A. Miller, Washington Times,
9/17/18.

The president also threatened to follow the $200 billion in tariffs on China with another $267 billion, essentially taxing all of China’s annual exports to the U.S. Beijing vowed to retaliate by canceling trade meetings scheduled for this week and unleashing more measures, including [restricting] exports to the US. The restriction could hit US companies such as Apple that operate in China, including blocking iPhone deliveries to the US, according to a Wall Street Journal report.

Realistically, faster economic growth should mitigate revenue loss from the tax cuts but not offset it entirely. Preliminary details and analysis of the Senate’s 2017 Tax Cuts and Jobs Act, Tax Foundation,
11/10/17.

The Senate’s version of the Tax Cuts and Jobs Act is a pro-growth tax plan, which, when fully implemented, would spur an additional $1.26 trillion in federal revenues from economic growth. These new revenues would reduce the cost of the plan substantially.

Turning to a different point, the primary reason for current and projected deficits isn’t tax cuts, it’s spending levels. A cumulative deficit of $8 trillion is currently projected over the next 10 years. At most, this could be reduced to $6.5 trillion if the tax cuts ($1.5 trillion over 10 years on a static basis) were foregone.

As for reducing deficits by raising taxes (not simply foregoing tax cuts), experience has shown this is easier said than done. First, tax increases often fail to produce the anticipated amount of revenue due to their negative impact on economic results (slower growth results in loss of tax revenue) and changes in taxpayer behavior. Second, tax increases encourage demands for additional spending. Re the cut spending/ raise taxes debate,
7/12/10.

Bottom line, the quickest and surest way of reducing the deficit is to eliminate wasteful spending – there is a bunch of it in the federal budget – which not only saves taxpayers the dollars involved but also (like a tax cut) boosts the economy by shifting resources to the productive private sector.

Unfortunately, neither party has much to brag about when it comes to spending discipline. Consider the manner in which the Bipartisan Budget Act of 2018 (BPBA), which paved the way for a two-year spending spree and restored dozens of special interest tax breaks, was announced by Sens. Mitch McConnell and Chuck Schumer. More shutdown drama, mediocre results,
2/12/18.

Sen. McConnell called the agreement "significant," stressed the importance of increased defense funding, and thanked the other side for its cooperation. Sen. Schumer called it a "breakthrough" and "a win for the American people," lauded increased spending for the military but spent more time talking about various increases in non-defense spending, and thanked the other side for its cooperation. *** Neither leader mentioned the deal's effect on the government's deficits and debt (even though one of its terms was a one-year moratorium from the debt ceiling).

All things considered, our inclination would be to fault both parties for the fiscal problem – in about equal measure – and ask what they propose to do about it.

B. Budget process – Despite scanty evidence of congressional interest in fighting deficits and debt, two suggestions for approving the budget process are being worked on this year – if nothing else to “show concern” about the fiscal problem.

#JOINT SELECT COMMITTEE – The BPBA enacted in February included a section calling for appointment of a Joint Select Committee on Budget and Appropriations Process Reform. Sixteen members – 8 from the House and 8 from the Senate – selected respectively by Reps. Paul Ryan & Nancy Pelosi, Sens. Mitch McConnell & Chuck Schumer – recommendations including legislative language due by 11/30/18 – no specific indication as to what sort of recommendations were anticipated.

The JSC has conducted five public sessions to date, with videos posted on line. After the 3rd session, we wrote to the JSC members and other interested parties. SAFE letter,
6/25/18.

Our letter recapped the first three sessions (via links to blog entries), suggested effects of the Senate filibuster rule should be considered, and recommended some additional witnesses (Tom Schatz of CAGW, Michael Tanner of Cato, and OMB Director Mick Mulvaney). None of the JSC members or other political leaders responded to these comments.

There have been two more public sessions since June 25:

•4TH public session, JSC,
6/27/18, video (3:41) - This Members Day event generated input from 26 members of Congress. The Senate was represented by Sen. Sheldon Whitehouse, a JSC member, and lame duck Sen. Bob Corker. 17 of the 24 House participants were Republicans.

Speaker Paul Ryan endorsed the idea (previously suggested by Sen. Mike Enzi) of doing biennial appropriation bills on a staggered 6-per-year basis. According to Ryan, the Senate can’t realistically be expected to move 12 appropriation bills every year. There didn’t seem to be much buy-in from other participants.

Abolition of the filibuster rule was suggested by Rep. Roger Aderholt (R-AL) and pushed by Rep. Hal Rogers (R-KY). Rogers cited a recent meeting at which Trump was “very strong” on this idea. No other participants mentioned the filibuster rule as a problem.

Democrats said the Senate is doing better on appropriation bills with a bipartisan approach this year, whereas the House is causing problems by proposing scores of “riders” re extraneous policy issues. Minority Leader Nancy Pelosi credited Clinton for balancing the budget and blamed Bush 43 for squandering the victory. She seems to favor raising taxes and bringing back PAYGO.

•5TH public session, JSC,
7/12/18, video (2:21). - Two witnesses, (A) former Secretary of Defense (also House budget chair OMB director, White House Chief of Staff, and CIA director) Leon Panetta, and (B) long-time House appropriator David Obey, agreed that the fiscal process is “broken.” They placed most of the blame on a deepening partisan divide versus defects in the budget process.

Obey doesn’t think the House & Senate budget committees are accomplishing much and suggests it would be fine to abolish them. The fiscal process worked better, he said, before Congress enacted the Budget Control Act of 1974 to show President Nixon who was boss. Panetta demurred on grounds that someone needs to take an overall view of the budget and the appropriation committees aren’t well suited to do this.

Why won’t the two parties work together? Obey blames gerrymandering of House voting districts, which results in many “safe” seats (and undermines the incentive for members to be responsive to their constituents). Panetta says effective governing used to be a good politics between elections, but he’s not sure that’s true anymore. He sees no obvious way to restore the status quo ante.

At the end, Co-Chair Rep. Steve Womack said the JSC had satisfied its statutory minimum of five public sessions. With the reporting deadline of November 30 coming up, he urged that JSC members turn in their process reform proposals (some had already done so) to set the stage for informal discussions of what the JSC should recommend.

There have been no public sessions since July, nor has there been any indication of what the JSC report will say. This matter will probably be kept under wraps until after the elections. We doubt the process recommendations will have a major effect on budget outcomes, but will assess them when available.

#REGULAR ORDER - Following enactment of the BPBA, the congressional appropriation committees started allocating the authorized budget levels for FY 2018 (then about 1/3 over) “discretionary spending” to specific activities and programs. Approval of their efforts seemed like a foregone conclusion until the president started firing off tweets that he was displeased with the OAB and might veto it (thereby triggering a government shutdown). Stay tuned for his remarks at 2:00 PM on March 23!

At the appointed time, the president announced that he would sign the OAB after all, given the urgent need to boost defense spending, but blasted “this ridiculous situation that took place over the past week.” Hundreds of pages – $1.3 trillion in spending – text published at the last minute – nobody read it. Memo for Congress: “I will never sign another bill like this. I’m not going to do it.”

Although the president referred to waste in the OAB and the $1.3 trillion (for one year) price tag, he didn’t criticize the overall amount of spending or comment on the resulting increase in deficits and debt. Rebooting the budget process,
4/9/18.

Would the president’s remarks inspire congressional members to start complying with the deadlines specified in their own budget rules? So far, the results are mixed.

The president’s budget proposal was submitted on schedule in February, but neither house of Congress passed a budget resolution so the government has no budget for FY 2019 (which will begin on October 1).

True, the House Budget Committee approved a FY 2019 budget resolution in June. It was entitled “
A Brighter American Future,” and the 10-year projection indicated a balanced budget by 2027 (versus deficits every year in the president’s budget proposal) But the ABAF budget resolution wasn’t voted on by the full House, let alone sent to the Senate for its consideration.

Work on appropriation bills was accelerated, in the Senate as well as the House, with the aim of passing most of the appropriation bills before the October 1 deadline. Conservatives complained, however, that Democratic cooperation was being dearly bought. Passing bills on schedule isn’t enough, Justin Bogle, dailysignal.com,
9/17/18.

With the exception of defense funding, the bills being put forward fail to reflect the priorities of conservatives. To get higher defense spending, lawmakers have given up on reducing spending in favor of across-the-board increases for most discretionary programs. They have also capitulated on advancing conservative policy priorities [e.g., by defunding Planned Parenthood].

One of the most galling points from the president’s perspective has been the failure to win significant funding for the border wall, with Republican leaders cooing that this was not the right time to press the issue. Trump poised to win $5 billion to build border wall [after the elections], Paul Bedard, Washington Examiner,
9/14/18.

Last Friday, the president signed three appropriation bills and enactment of at least two more (including the defense bill) is expected this week. The rest of the 12 appropriation bills will remain pending, with a continuing resolution (until after the election) to avert an October 1 shutdown of the operations affected. Trump signs first three-bill spending package for FY 2019, David Sherfinski, Washington Times,
9/21/18.

In short, progress has been made on paper, but the budget outcomes resemble those achieved for fiscal year 2018.

C. Path forward – The government’s budget process is far from perfect, and the JSC may suggest some worthwhile improvements, but the resulting benefits will probably be modest. The real problem is not that the budget process is “broken,” it is a lack of political will to make the existing process work properly.
Spending and benefit programs have been allowed to balloon over the years, without regard to their true justification or the public’s willingness to pay for them. Many Americans support raising taxes in the abstract, but are less than enthusiastic about paying more taxes out of their own pocket. Borrowing to cover deficits has become a habit that won’t be easy to break.

Solving the fiscal problem would require a generally accepted principle to guide the actions of the persons involved. Here’s our suggestion: barring a major war or a true national emergency, the government’s budget must be balanced each and every year. SAFE letter to the members of Congress,
6/3/13.

Some may advocate reducing the deficit to a “sustainable” 3% of Gross Domestic Product, but a balanced budget policy would offer three advantages: (1) Reserve government borrowing capacity for true emergencies, e.g., a major war. (2) Control borrowing costs, which over time threaten to crowd out desired programs. Net interest expense, is currently running over $200 billion per year; it is projected to more than triple over the next 10 years. (3) Minimize the temptation for government leaders to make spending commitments now that will not be affordable later.

Senator Rand Paul responded (scroll down to end of the letter), basically expressing his agreement, but nothing was heard from the other 434 addressees – nor has there been any observable change in congressional behavior. So SAFE “told truth to power,” and power apparently didn’t want to hear it!

Now what? Here are three suggested points (adapted from ideas thrown out in the
JSC letter):

#GET CRACKING - There has been a tendency to define deficits and debt as a long-term problem, thereby rationalizing the deferral of corrective action. Plenty of government programs and activities aren’t truly justifiable, i.e., costs exceed benefits for the general public (as distinguished from program beneficiaries or government administrators). Congress should start slashing wasteful spending without further delay. See, e.g., the hundreds of billions of dollars in near-term deficit reduction opportunities identified in the
Prime Cuts inventory of Citizens Against Government Waste.

#THINK BIG - It’s true that the fiscal problem can’t be fully solved without doing something about Social Security, Medicare, Medicaid, etc., and the actions involved transcend the confines of the normal budget process. Accordingly, one or more special commissions should be appointed to study these programs and recommend reforms.

#COOPERATE - It’s hard to imagine a major improvement in budget outcomes unless our political leaders start working together, and that sort of unity can’t be expected to develop in Congress. 535 members elected to represent their respective districts or states – no term limits - two different houses with “go along to get along” rules. The only realistic hope is strong presidential leadership re deficits and debt, which hasn’t been seen since the 1990s.

As for what candidates should be saying on the campaign trail this fall, we would hope to hear acknowledgement that the fiscal problem is serious and advocacy of credible solutions versus the usual finger pointing.


**********FEEDBACK**********

#The end is nigh. A Greater Depression is inevitable. Smart people will just run up as much unsecured debt as possible before the system reboots. I just don't have the courage to do it. – SAFE director

#Alexander Hamilton was the financial genius who created our nation's fiscal and monetary system; he did not advocate a balanced budget; he believed debt arising from borrowing was a "blessing", but he also cautioned that it not be excessive, and that a sinking fund be established for its repayment. Today, much of the national debt is unpayable derivatives that must be wiped out if economic progress is to be achieved. The budget and interest rates, etc. are not the problem. The entire Atlantic financial system is now bankrupt and must be re-organized. Both parties are to blame. – SAFE member (DE)

Comment: The US inherited, and eventually paid off the Revolutionary War debt. The current situation involves something of a role reversal, in that the US is now in the role of financial top dog. Wiping out much of the national debt would be tantamount to default, no matter how the mechanics were characterized, and the consequences could be dire. This subject warrants further discussion, and your faithful scribe plans to put it on the agenda for the next SAFE meeting.

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